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Friday, 26 April 2013

Alberta’s (Non)-Carbon Tax and Our Threatened Climate

Why is Alberta’s policy a regulation and not a tax?

Alberta’s government officially says it doesn’t have a
carbon tax, and I agree. But if I had a dollar for every time I’ve heard
someone claim it does, I could buy a lot of anti-oil sands ads, and maybe a
politician along the way.

I hear about Alberta’s so-called carbon tax from business
people, politicians, journalists, environmentalists, sometimes even economists (who
should know better). But the policy in question is, in fact, a “performance
regulation,” that sets a maximum “emissions-intensity” for industries, and fines
them $15 for each tonne of CO2 emissions in excess of that maximum.

The way it works is that government picks a base year, say
1990, and tells an industry it must achieve a percentage reduction in the
amount of CO2 it emits for each unit of its output, be that oil,
steel, electricity, petrochemicals, paper, whatever. If the industry in
question is a coal-fired power plant, the regulation requires a percentage reduction
in CO2 emissions per kilowatthour generated. If the industry is an
oil sands facility, it requires a percentage reduction in CO2 emissions
per barrel of oil produced.

If the industry satisfies the performance regulation –
achieves the required percentage reduction in emissions-intensity – it pays
nothing. But if it fails to comply completely, then it must pay the $15 fine
for each tonne of excess CO2. (For simplicity, I ignore additional
complexity in the Alberta policy that allows firms to avoid the fine by (1)
buying credits from industries who “out-perform” their performance regulation,
or (2) purchasing offset credits from unregulated entities, like farmers, who
ostensibly reduce their emissions.)

Note the stark contrast with the carbon tax. The tax is levied
on all emissions – the more you emit,
the more you pay. With the performance regulation, emissions are free as long
as an industry achieves its required percentage reduction in emissions-intensity.
Its emissions could even rise dramatically and still be free of any charges.

A look at the oil sands industry in aggregate shows this.
From 1990 to 2011, emissions from Alberta’s oil sands almost quadrupled, from
15 million tonnes to 55 million. At the same time, the industry’s emissions-intensity
(CO2 per barrel of oil produced) declined 26%, mostly because of technological
innovations. If a performance regulation had required a 25% emissions-intensity
reduction over this period, then all emissions would have been in compliance,
and therefore free of charges – even though carbon pollution had increased
enormously.

So why would anyone confuse Alberta’s regulation with a
carbon tax?

My 25% example suggests a performance regulation that is
“non-binding” – it imposes no costs on an industry because the required
emissions-intensity reduction is less than the reduction that would have happened
anyway. But what if the regulation is binding? What if an industry finds that
it must either spend money to reduce its emissions or pay fines for its excess
emissions?

This is, in fact, the case with Alberta’s regulation.
Starting in 2007, it required large industries to reduce their emissions-intensity
by 12%, with additional intensity reductions over time. Between 2007 and 2012,
regulated Albertan firms paid over $300 million in fines for non-compliant
emissions – into what the government calls a “technology-fund.” And they have
undoubtedly also spent money to reduce their own emissions wherever such
expenditures were cheaper than paying the fine of $15 per tonne. (Again, I
ignore for simplicity purchase of offsets.)

Because its performance regulation is binding, Alberta’s $15
fine for non-compliant emissions appears to replicate the effect of a carbon
tax. Firms facing a $15 carbon tax are motivated to reduce emissions wherever
the cost of doing so is less than the cost of paying the tax. Likewise, firms
facing a $15 non-compliance fee under Alberta’s performance regulation are
motivated to reduce emissions wherever the cost of doing so is less than the
cost of paying the fee.

And this is why some people call Alberta’s performance regulation
a form of carbon pricing, even carbon taxation. Some people have even equated
Alberta’s carbon price of $15 per tonne of CO2 with BC’s $30 carbon
tax, and suggested that if Alberta increases its fine for excess CO2
emissions to $40, as has been discussed, its effort to reduce carbon pollution
will exceed BC’s.

But this is not true. It’s an attractive claim, if you are trying
to get rich by rapidly and dramatically expanding oil sands output in Alberta.
But it’s not true. The reason is that a carbon tax is applied on all emissions whereas the Alberta
non-compliance fine is only applied on a small percentage of emissions. So the
two policies have dramatically different effects on the total cost of
production of an emissions-intensive industrial activity, like producing oil
from oil sands. And the Alberta oil industry and the Alberta government know
this well.

An extreme case helps make this clear. Suppose that Alberta’s
performance regulation required an immediate 100% decline in emissions-intensity
(meaning zero carbon pollution), and levied a fine of $30 on all non-compliant
emissions (without offsets or other escape options). In this case, its effect would
be identical to BC’s current carbon tax. De
facto, it would be a carbon tax in
that each and every tonne of emitted CO2 would require payment of $30.

Now, imagine that you wanted to build a new oil sands
facility that you hoped would be profitable – meaning that its average cost of
production would be lower than the market price garnered by oil from the oil
sands. Unless you had a technology up your sleeve that would eliminate CO2
emissions at a much lower cost, your cost of production could increase by as
much as $30 for each tonne of CO2 emitted. According to experts, this
could add $4 to the production cost of a typical barrel of oil from the oil
sands.

In contrast, if the $30 were only applied to 12% of
emissions, in the case where a firm had no lower cost options to reduce
emissions with Alberta’s current policy, then the effect would be to increase
the production cost of each barrel of oil by 50 cents.

At today’s oil prices, the difference between $4 and 50
cents might seem piddling. But what happens if we take our political leaders at
their word when they promise to do everything they can to prevent global
temperatures from rising more than 2 °C, as Stephen Harper promised at a G20
meeting in 2009, and again at the Copenhagen climate summit later that year?
Modeling by Canadians (often modelers associated with me I confess) and various
international teams at MIT, University of Maryland and other institutes in
Europe show that the planet would need something like a global carbon tax (on
all emissions) of $100 in 2020 and $200 in 2030. This could increase the
production cost of each barrel of oil by $12 and $24 respectively.

What is the likely effect of politicians keeping their
climate promises on oil sands production?

Carbon pollution charges at this level would cause a significant
increase in the cost of producing oil from the oil sands. And its effect on oil
sands profitability would be devastating because, at the same time, the
international price of oil should be falling. As humanity shifts away from gasoline
and diesel in order to reduce CO2 emissions, the demand for oil would fall,
which in turn would cause a falling price. The net effect? No oil sands.

In 2010 and again in 2012, a world-leading team of global energy analysts at MIT found that oil sands expansion makes no sense in a world
that stays within the 2 C limit. In 2010 and again in 2012, researchers at the
International Energy Agency got essentially the same result. Current oil sands
production can continue for decades. But expansion makes no sense. As the MIT
team noted, "The niche for the oil sands industry seems fairly narrow
and mostly involves hoping that climate policy will fail."

One way for climate policy to fail is by having none.
Another is to have climate policy that looks to have more effect than it
actually does. Alberta’s performance regulation is a good example.

Great article! But the correct word for Alberta's bitumen production from places like Athabasca deposits is "tar sands" not "oil sands". It is thick and highly viscous and it is not liquid like oil. In fact you can say it is semi solid like asphalt.

The Friendly Giant: I would love you to tell your comments to the low-lying islands in the Pacific and Indian Oceans. You would find that they disagree with you.

You say that "The best policy would be to have no carbon tax or regulation and focus on what's important. Development, civilization and prosperity." ----- why would you agree with a policy that says "it's OK to use the environment as a free sewer"... it would be like saying "go ahead, dump your garbage and sewage on my front lawn every morning ... it's not important". In my view the only way that you can ignore including the environment in your trilogy of important focii is that you are ignoring the fact that wrecking the environment will sooner or later wreck any opportunities to be prosperous... We on this planet are living out the Easter Island syndrome... except that most people haven't yet realised it and are just looking at their own back yard and saying "isn't life just great"... looking beyond and seeing the bigger picture would cause you to arrive at different conclusions.

"We think a price should be put on carbon. Ideally the model would be a national carbon tax."Gordon Lambert, Suncor VP of Sustainable Development“Canada's Oil Insiders Want a Carbon Tax”http://thetyee.ca/News/2012/06/20/Carbon-Tax-Supporters/

It's ironic that some of the loudest voices in Canada calling for a carbon tax are from the oil companies. Meanwhile, however, how do the rest of us feel about climate change and carbon taxes? You can see it here: www.carbonconversations.ca

Thank you Mark for taking on the role of Environment Watchdog. I read your article "The Accidental Activist" in the Walrus that prompted me to find you online for more information. It is becoming clear to me that Canada needs more qualified individuals like yourself, Rafe Mair in BC and Naomi Klein to keep us accurately informed.